Archive for September, 2009

Saffron Building Society has announced it is to withdraw, albeit temporarily, from the equity release market after meeting its lending targets for this year.

It has taken this action following a successful year of lending in which 2009 targets have now been met. Also by Saffron withdrawing from the sector now will ensure their lending portfolio remains balanced and within borrowing strategy.

A sensible approach maybe?

However, this follows the latest setbacks to the market, which has resulted in lenders pulling their products or even positioning themselves so as to reduce their exposure to the equity release market.

This has added in a long line of lenders removing their equity release schemes over the past 12 months; we had Retirement Plus who had funding issues, Dunfermline hit by the credit crunch & Godiva who recently felt longer term funding was too expensive & consequently decided to ‘temporarily’ withdraw from the equity release market.

Also, recognized lenders such as Bradford & Bingley, Standard Life and Bristol & West whom all used wholesale markets to fund their new business, pulled out of the equity release market last year.

Who knows if any of them will be back – certainly not in the short term?

Last week New Life Mortgages reviewed its equity release product range. The New Life Gold product which offers their highest release possible, had its maximum facility slashed by 8%, effectively ruling itself out of the maximum loan end of the market. It also withdrew both drawdown products which are now under review & possibly re-introduced later this year.

But it’s not just the equity release companies who have been affected. Intermediaries too are under financial pressure with this niche product.

We had the news recently that Newcastle Building Society are to withdraw their equity release advisory service by the end of the year. They have offered advice on equity release schemes since 2006 & stated the decision was due to the ‘considerable contraction’ in the equity release sector.

In Retirement Services, a prominent player in the tied sales force environment went into administration at the end of July with again lack of funding & a purchaser for the business not found. If a company who had been in the market since the 1990’s is left floundering, what is left for the rest of the equity release market?

Well, the demand for advice in equity release is still high, but with providers and specialist equity release brokers withdrawing from the market, as economic conditions become more strained, only points to one outcome.

Lenders want consumers to have choice & access to good quality advice. Hence, the departure of such lenders & brokers and also their competitive equity release schemes means in the current climate – ‘only the tough will survive’.

Equity release companies who position themselves carefully, without too much exposure are the ones who will deliver in the long term & ride out the current storm.

Could equity release assist the resurgence in the buy to let market & reclaim it from the doldrums?

With the equity release market becoming more & more competitive, we focus on a particular product that has found itself a niche in this market.

You can’t have failed to notice in the past 6 months that ‘mortgages’ have become synonymous with terms such as ‘credit crunch’ & ‘falling property values’ & anything involving difficulty in obtaining credit.

The mortgage market is showing preliminary signs of improvement, but not before time & there is still a long way to go before its back on its feet.

One particular area in the financial services sector that has been associated with this slump is the buy to let mortgage. With blame being apportioned to these products having acted as part-catalyst to the advent of the credit crunch, lenders have had their fingers burnt & even withdrawn from lending on these products. It’s therefore difficult to see how they will recover in time & ahead of the general mortgage market.

However, all is not lost. You’ve heard the saying ‘being in the right place at the right time’ – well this could be one of those moments!

There has been a Landlord Equity Release scheme available for a number of years which has been drifting along without much prominence. This equity release scheme from New Life Mortgages enables landlords over the age of 55 to be able to assist them financially by releasing capital from their buy to let portfolios.

Buy to let landlords generally build their portfolio’s by relying on property values to increase. Once additional equity is built up via property value escalation, the landlord can then apply for a buy to let remortgage to raise additional capital. These new funds can then be used as a deposit towards to next purchase…& the momentum continues.

The problem now is that property values have fallen, hence this portfolio creation technique has been somewhat dismantled.

With the buy to let market having experienced massive growth over the past decade, thousands of mortgagees are now relying on the equity in their buy to lets and holiday homes for retirement purposes.

So how can equity release help?

Well, landlords over the age of 55 can now raise equity without having to sell their properties or even pay any monthly mortgage payments in the process. Instead, the interest is “rolled up” and the loan is repaid only on death, go into long-term care or the house is sold.

This equity release scheme has proved to be attractive to landlords who want to release equity in their portfolios in order to supplement their pensions. With the current depressed property market, landlords may be reluctant to sell & thereby delay the eventual sale in order for their families to benefit from future growth.

The New Life equity release scheme could be taken out on an unencumbered property in which the capital raised could be used in assisting with retirement plans or even the purchase of another buy to let property.

Alternatively, the plan could be used to repay an existing mortgage. Thus, by not having to make any further monthly mortgage payments & with the landlord still in receipt of rental income, this has the overall effect of increasing their retirement income.

Another benefit of this scheme is from a taxation viewpoint.

By taking out equity release, landlord’s could potentially avoid a capital gains tax (CGT) bill they would pay if they sold up — although they would be still be passing on a reduced tax liability to their heirs. This can also apply to inheritance tax.

New Life’s equity release scheme takes advantage of the Inland Revenue rule that profits are revalued when someone dies. When people die and leave their belongings to their family, or indeed anyone else, there is no CGT to pay at the time. When the property is eventually sold, CGT is based on the difference between the proceeds of the sale and the market value at the time of death.

Another perk for landlords is that the interest charged on the equity release can be offset against the tax on the rental income, even though the interest is rolled up.

The scheme is also available on holiday cottages and second homes, thus extending the markets potential.

Other benefits in brief are that the New Life equity release plan has no impact on the landlord’s main residence. This will leave it free from any potential legal charges on the property.

Finally, the landlord can raise commercial finance at a residential rate which is currently 7.25% compounded monthly.

Main features of the buy to let scheme are: –

· Minimum age of the youngest must be 55

· LTV’s start at 15%

· Minimum loan £26,000

· Minimum property value of £100,000

· Rental Income must exceed the interest being charged

· Never owe more than the value of the property

· Early repayment charges are over 5 years

It is niche equity release products like this from New Life Mortgages that will instill further confidence in the current subdued property market & we look forward to further innovations in this sector.